They are, once again, flummoxed when the RBI governor, in his monetary policy statement on Friday, said that the ‘orderly evolution of yield was explicitly regarded as public goods as the benefits accrue to all stakeholders in the economy’. Except the pensioner depending on fixed deposit interests, it helps everyone else: companies, homebuyers, stock investors, and even GoI that finds sovereign downgrade unacceptable.
Last year, when Das first likened a well-behaved yield curve — a gently upward sloping line showing that interest rates on long-term loans are higher than on short-term loans — to a public good, amused market dealers and economists thought it was just an unusual use of words in unprecedented times. ‘Public goods’ — which is provided without profit for the well-being of the public — does not figure in trading manuals or in the lingua franca of dealing rooms. So, when Das reaffirmed on Friday that preserving the shape of the yield curve is like offering public good, it was a monetary policy that was ‘out of syllabus’. The governor drove the point home while referring to GoI’s huge borrowing in FY2022 to support growth and RBI’s job as New Delhi’s merchant banker.
His exact words: ‘…we look forward to the continuance of the common understanding and cooperative approach between market players and the RBI during 2021-22 also.’ No matter how well-meaning Das may be, it’s a curious style of central banking. Here’s a situation where the central bank, which is the largest buyer in the market, is asking the market for help. Probably no central banker — actors who give signals and let markets function — has ever made such an appeal to the market.
Traders, a tribe beyond subtlety, take it as a blunt message: as New Delhi borrows and spends its way out of a slowdown, RBI will somehow try to keep interest rates low (by buying bonds and dollars to create liquidity that would push up bond prices and bring down bond yields). But banks, particularly public sector banks (PSBs), and bond houses must also play their part, by buying bonds among other things. Remember, we are all in this together.
The market has learnt to trust Das. Though bondmen sold securities on Friday — with RBI not spelling out how it would go about buying bonds in open market operations — the sell-off would have been more if Das wasn’t the governor. Das is banking on this credibility and his image as a dove, in hinting that interest rates will be kept low while promising, although in a veiled manner, to keep his end of the deal as long as markets behave. It’s monetary policy in the time of pandemic.
Despite RBI’s large armoury of tools, the market knows that at some point, the central bank will reach its limits. As growth and inflation return, how long can Das hold interest rates low? What if the recovery is faster? At that stage, the governor may find it far more difficult to convince the market — no matter what deal he offers.
